The International Monetary Fund raised its forecast for the global economy on Tuesday due to unexpectedly strong growth in the USA and economic stimulus in China. The IMF forecast growth of 3.1% this year, up 0.2 percentage points from its October forecast.
The two benchmarks fell more than 1% early in the session after Hamas said it was studying a proposal to halt fighting in Gaza, a sign that diplomacy to de-escalate the war could be gaining traction.
Oil prices settled down more than 1% on Monday as China's housing crisis raised concerns about demand in the world's second-largest economy.
“The impact of a potential collapse in China’s real estate sector makes any government stimulus questionable and will trigger very negative global shockwaves,” John Evans of oil broker PVM wrote in a note.
Traders are also watching to see how the U.S. will respond to a drone strike that killed three of its soldiers in Jordan on Sunday. President Joe Biden blamed the attack on Iran-aligned militants in Syria and Iraq.
Biden said the US would “hold those responsible accountable at a time and in a manner of our choosing.” Defense Secretary Lloyd Austin said the Biden administration will “take all actions necessary to defend the United States, our troops and our interests.”
Still, National Security Council spokesman John Kirby appeared to downplay the possibility of a direct confrontation between Iran and the United States
“We are not seeking war with Iran,” Kirby told reporters at the White House on Monday. “We do not intend to escalate tensions any further than they have already escalated.”
Iran has denied any involvement in the attack.
Retired U.S. Navy Admiral James Stavridis, a former NATO allied commander, said surgical strikes would not deter Iran-allied militants. The Biden administration will likely launch a broader campaign that will not trigger a full-scale war, Stavridis said.
“You're going to see a week or two of serious attacks against Iranian proxies, but not in Iran itself,” Stavridis, vice chairman of global affairs at the Carlyle Group, told CNBC's “Squawk Box” on Tuesday.
“Probably Iraq, Syria and Yemen are the three places where the administration will engage in the next week or two,” Stavridis said.
The oil market's reaction to geopolitical tensions in the Middle East has been muted, although analysts say a conflict between Washington and Tehran is a scenario that would likely drive prices higher.
Stavridis said the deaths of three U.S. soldiers raised the likelihood of a larger conflict, although he noted that neither Washington nor Tehran want a larger war.
White House energy security adviser Amos Hochstein said disruptions to shipping in the Red Sea due to attacks by Iran-aligned Houthi fighters were “entirely manageable.” In the latest escalation, an oil tanker was hit by a Houthi missile in the Gulf of Aden on Friday.
“It's just a matter of rerouting the cargoes and the tankers, but it doesn't really impact oil prices or other commodities and other cargo ships,” Hochstein told “Squawk on the Street” Tuesday.
Crude supply from the United States, Brazil and Guyana has increased tremendously while global demand remains largely stable, he said.
“At the end of the day, demand and supply are balanced,” Hochstein said.